“The lack of scale and scope” of the combination would disadvantage the new railroad and damage shareholder value, Norfolk Southern Chief Executive James Squires said on Friday in disclosing its board unanimously turned down CP’s offer. “The proposed transaction risks harm to vital transportation infrastructure and the communities we serve”.
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Based on commentary from CP’s CEO Hunter Harrison at a webcast Q&A session we hosted with him on Nov 19, we believe that CP is likely to remain focused on combining with NSC.
A representative for Canadian Pacific couldn’t immediately be reached for comment.
Norfolk Southern also called the $28 billion USA offer – which would create the largest railroad on the continent – “grossly inadequate”. Discussions with shareholders also “helped inform our board’s decision”.
Calgary-based CP Rail is offering US$46.72 in cash plus 0.348 shares in the new company, which would be owned 41 per cent by Norfolk Southern shareholders.
Norfolk expressed doubt that the deal would clear regulatory hurdles in dismissing the unsolicited offer on Friday.
“Norfolk Southern has made growth investments and we expect to realize the benefits of these investments in the years ahead, especially as our intermodal volumes continue to build”, Squires said in a statement Friday. The lower a railroad’s operating ratio, the more efficiently it runs and the more profitable it can be. “The end result will get some nice earnings power and a higher valuation”, he said.
The combination would have created a transcontinental railroad while increasing CP’s access to East Coast ports. Harrison has said that a combination would ease congestion in the eastern United States, where Norfolk Southern is the No. 2 operator, and offer customers more choices through such steps as opening up terminals to other railroads.
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At the same time, CP needs Norfolk because the Canadian railroad’s aggressive cost-cutting moves to date mean it has few options left to fuel growth beyond acquiring a rival, according to a mergers and acquisition lawyer not working on the deal. He said as much as 60% of Norfolk Southern’s general merchandise business, which includes coal, would be open to poaching. “Even in the unlikely event of approval, Norfolk Southern would be in limbo for this extended period, causing loss of momentum and disruption to our business and operations”.
